In spite of numerous tweaks to GST rates and rules in the past one year, India’s version of the goods and services tax remains complicated, compared to peers around the world.
Some features that are unique to India’s GST model have made the law too complex. And its messy implementation took a toll on businesses in initial months as compliance costs spiked.
India has a multi-tier tax rate structure. Tax rates were decided to minimize the impact on inflation and make them revenue-neutral for the government.
Apart from the five tax slabs of 0%, 5%, 12%, 18% and 28%, some items such as gold have been taxed at 3%. What’s more, when brought under the GST ambit, the highest rate of 28%, plus local sales tax or value-added tax (VAT) levied by states, is likely on petrol and diesel. For now, a sugar cess under GST may be on the cards.
Clearly, this is a deviation from the international norm of a dual or single tax rate. Though rationalization of GST tax slabs has been talked about, executing it may be easier said than done.
It should be noted that India has a federal structure. GST revenues are divided between the centre and states. While a unified GST is desirable and simpler, it seems like a distant dream since state governments may not be ready to completely give up their fiscal authority.
When put into practice, taxpayers were required to file GST returns on a monthly and annual basis making use of GSTR-1, GSTR-2 and GSTR-3 forms. A complex procedure to file returns coupled with technical glitches in the GST Network made the process a nightmare for taxpayers.
A hassle-free tax-filing process is always welcome because it directly impacts the flow of input tax credits. In an attempt to ease taxpayers’ pain, forms GSTR-2 and GSTR-3 have been suspended. Firms are now required to file GSTR-1 and a summarized return GSTR-3B form.
However, the annual returns filing format is still a work in progress. As per some tax experts, the delay is adding to uncertainty among businesses and details should be put in the public domain at the earliest. In many countries, assessees file GST/VAT returns quarterly, half-yearly or annually. In India, only those under the composition scheme can file returns on a quarterly basis.
Other distinctive measures such as the reverse charge mechanism and invoice matching are yet to be implemented. There are mixed views on whether these will meet the objectives of boosting revenues and increasing tax buoyancy without adding to complexity. In any case, tax experts feel that software systems must be tested well in advance and businesses should be given enough time to prepare to avoid trade disruptions, as experienced in the past.
Unlike in other countries, businesses in India were not given enough time to prepare ahead of GST implementation in July last year. In Malaysia, more than a year’s time was given to the industry to prepare for the tax change.
One fallout of a complicated tax system is increasing litigation. An increasing number of investigations by the National Anti-profiteering Authority and the flood of advance rulings point to the fact that many aspects of GST need urgent streamlining. But given the challenges on the political front, meeting global standards may be a long-drawn process.